RBS shares +2.8% have bucked the trend of UK bank peers this week with a positive reaction to Q3 results. This after adjusted operating profits of £1.245b easily beat £1bn expectations thanks to much lower conduct charges and restructuring costs. It also managed an impressive 70bp improvement to the closely watched Core Tier 1 capital adequacy ratio, exceeding consensus of +50bps, to get back above 15%.

Impairments may have been a shade more than forecast (£143m vs £136m), but investors are clearly giving the still state-owned bank (71%) the benefit of the doubt as it continues its phoenix-like rise from the financial cr-ashes. Especially after management reiterated FY17 guidance and expectations for a return to full-year profitability in 2018. After three successive quarterly profits, this suggests a potentially expensive Q4 in terms of resolving US legal overhang (at least £6bn DoJ fine for MBS mis-selling?).

It may still be a case of “next year Rodney”. However, given where the bank has come from in terms of travails, this morning’s positive reception to the Q3 update suggests shareholders still of the view that, in the grand scheme of things, it’s not that much longer to wait for those long lost dividends. Resumption at LLOY has already helped revive interest in the shares, fuelling a 55% bounce from Brexit lows. But this pales into comparison to RBS which continues to outperform, not far from doubling over the same period and up over 20% since September’s sell-off versus a mere 12% rebound for its peer.

With LLOY now out of government clutches, and paying dividends, does RBS still offer more recovery potential and upside?

Mike van Dulken, Head of Research, 27 Oct 2017